Wednesday, 14 May 2014

Growth in China: Steel vs Butter

Diverging fortunes of
countries down under illustrate how China is changing

Trading with China can be like a roller coaster ride – lots
of ups and downs without knowing what is coming next. At a time when most of the global economy has
been in the doldrums, tapping into the Chinese market has lifted the economies
of a lucky few. Australia and New
Zealand are among the fortunate ones, but the diverging fortunes of these two
countries highlight a shift in China’s development which will have profound
effects for many others.

Riding out the twists
and turns

Economic development of any country is never a smooth
ride. Growth in China has been bumpier
than most with its economy jumping into life at a time when the world was
becoming a much smaller place due to globalization. The Chinese economy has expanded at an
unprecedented pace due to its role as a manufacturing base built on access to foreign
markets and funds from overseas. This has resulted in greater scarcity of many
of the basic commodities extracted from or grown in the ground.

Countries fortunate enough to possess an abundance of
natural resources, such as many in South America and Africa, gained a boost
from high commodity prices at a time when the global economy is weak. But these benefits are likely to be a
temporary upturn with demand for commodities shifting as China develops. The initial stages of the growth in China came
through investment amid a building frenzy as firms rushed to put up factories
to produce goods for exporting. This has
continued as the Chinese government has ramped up spending on infrastructure to counteract the
weak global economy.

The result has been a prolonged period of China sucking in resources
such as iron ore, coal, and natural gas.
However, spending on investment was surging ahead at a pace which could
not continue and has shown signs of an inevitable tailing off over the past
year or so. The government has instead
eyed consumption as a new source of economic growth and as a means to keep the
population happy. This change in focus
in China will be felt throughout the global economy.

Good and bad of
changes in China

China was at the forefront of the mind of Your Neighbourhood
Economist during a recent visit back home to New Zealand and a side trip to
Australia. Demand from China helped both
countries to avoid a downward spiral following the global financial crisis,
with Australia racking up an astounding 22 years without a recession. Yet, it is Australia that is looking
nervously at developments in China while New Zealand is looking to raise
interest rates due to a booming export industry.

The reason for concern among Australians is that its mining
boom is starting to peter out. Exports
to China are still hitting record highs even as growth in the Chinese economy
slows. But investment in the mining
industry has dropped off as commodity prices have fallen. This leaves Australia in a tricky position as
money from mining has pushed up the cost of living, resulting in wages that are
too high to be competitive. Employment may
be starting to suffer - Your Neighbourhood Economist struggled to spot many
Australians among the cabin crew on the Qantas flights to and from London.

Two gauges of economic health augur tougher times
ahead. The central bank in Australia has
pledged to keep interest rates at a record low of 2.5% for some time. Along with this, the exchange rate for one
Australian dollar has dropped below parity with the US dollar after having been
worth more than its US counterpart in 2011 and 2012. In contrast, New Zealand has seen its dollar
continue to climb in value with the NZ central bank already having lifted
interest rates twice to 3.0% in 2014. It
is milk and cheese that is driving the upturn in the New Zealand economy with
the Chinese developing a taste for dairy products as their levels of wealth
expand.

The shifting fortunes of Australia show that tapping into a
growing Chinese economy has its downs as well as ups. Despite this, New Zealand shows how change in
China can be turned into a positive. With
China as one of the few bright spots in the global economy, this is a story that
a lot of countries will be interested in.